Automated investing startup Wealthfront is growing up fast by targeting young Millennial investors.
On Wednesday, the Palo Alto startup announced it has grown to $1 billion in assets under management in two-and-a-half years. Wealthfront, which bills itself as the “Investment Choice of Silicon Valley,” says its average client is in his early 30s. Sixty percent of its 11,000-plus clients are under the age of 35.
“We grew ten times from where we were in 2013 in less than 17 months,” said Wealthfront CEO Adam Nash. In May alone, Wealthfront attracted $100 million in new investments.
“It took us a year to get that; now we get it in a month,” said Nash. “It’s definitely my plan to grow even faster than that, and I’m sure it will turn to $200 million a month.”
Cashing In on the Millennial Investor
A recent study from UBS found that Millennials are holding more than half of their assets in cash, making them as financially conservative as the World War II generation of Americans aged 68 and older.
“[Millennials] were approximately in junior high school and high school during the financial crisis, and around age 16 is when people develop their beliefs around money and investing,” said Richard Peterson, M.D., managing director of MarketPsych. Dr. Peterson, a psychiatrist and behavioral-finance expert, is a consultant for firms such as Goldman Sachs (GS), Morgan Stanley (MS) and Merrill Lynch Global Wealth.
According to Peterson, the Great Recession led to two types of Gen Y investors.
“There are the people who are really scarred by the crisis, and they go to work and save diligently, and they don’t trust Wall Street or investments pitched by someone on Wall Street,” said Peterson. “The second [type] we see are speculative and in it for the fast buck. They are into startups … They are super risk-takers.”
Wealthfront is trying to appeal to both types of Millennial investors with its low-fee, automated investing platform. Clients start by taking a short quiz that assesses their financial profile and risk tolerance.
Wealthfront then puts together a portfolio of ETFs across various asset classes. The Wealthfront technology continuously monitors clients’ portfolios and rebalances periodically to maintain the right mix of investments according to customers’ profiles. Wealthfront’s services are free for accounts between $5,000 and $10,000, while accounts over $10,000 are charged an annual flat fee of 0.25%.
The investment team is led by Burton Malkiel, Ph.D., a professor emeritus of economics at Princeton University and former director of the Vanguard Group.
Nash said the company is focused on providing a user experience that is attractive to tech-savvy Gen Y. While Wealthfront has investors in all 50 states, Nash said about one-third of clients are located in Silicon Valley.
“Our aspiration here is to delight our clients. It’s fairly common in the software world, but not in the financial-services sector,” said Nash. “Millennials will talk about services if they love them – ‘like’ is not enough.”
To this end, Nash said almost all of the company’s growth can be attributed to word of mouth or online invitations: Clients who get friends to sign up get an extra $5,000 managed for free. Additionally, Wealthfront has invested heavily in online financial-education content. Nash said a popular “startup compensation calculator” has attracted more than 1 million unique visitors to Wealthfront’s website.
“[Millennials’] whole philosophy on investing is different. They want automated, low-cost and passive. They don’t, in general, buy the sales pitch of beating the market,” said Nash. “And what delights these consumers is the quality of the design, the simplicity and the transparency.”
The Rise of Automated Investing Startups
Nash compares Wealthfront’s opportunity to the one seized by discount brokerage Charles Schwab in the 1970s. Schwab started by targeting Baby Boomers in their 20s and 30s, and as customers grew up, the business grew as well. Today, Charles Schwab has $2.3 trillion in assets under management.
“The fact is that Millennials already control $2 trillion. That will grow to $7 trillion by 2018,” said Nash.
Given the potential of this market, Wealthfront is far from alone in trying to attract Gen Y investors. Betterment, Personal Capital, SigFig and Motif are just a few of the startups providing technology-enabled investing services.
Betterment, perhaps Wealthfront’s most direct competitor, told FOXBusiness.com that it is currently managing $595 million in assets, with an average client age of 36. The Menlo Ventures-backed startup grew its assets under management by $95 million since mid-April, when Betterment announced a $32 million Series C round. In total, Betterment has raised $45 million.
While automated investing startups have recently attracted plenty of venture capital (Wealthfront also raised a $35 million round in April, bringing total funding to $65.5 million), some experts express doubt that passive, automated investing platforms will be able to retain Millennials over the long term.
“To manage your money, you have to have a minimum level of expertise,” said Ravi Jagannathan, a co-director of the Financial Institutions and Markets Research Center at Northwestern University’s Kellogg School of Management. “[These platforms] are for really busy people who are trying to do things on their own.”
With that in mind, Jagannathan says more sophisticated investors may end up looking for asset-management services that are more hands-on.
“It’s hard to predict where they will go in the future,” he said.
And as Gen Y builds more wealth, it may need other services not currently provided by some of the startups in the field.
“There are some instances where having a human advisor makes sense. Like for high net-worth investors, their financial situation tends to be more complicated. Estate planning-type needs may not be dealt with effectively [by these startups],” said John Longo, clinical associate professor of finance and economics at Rutgers Business School.
In spite of these concerns, Nash remains bullish on Gen Y’s appetite for high-tech investing software. He said he believes automated investing startups will pose a real threat to traditional investment banks sooner than some analysts may expect.
“It took Charles Schwab six years to get to $1 billion,” said Nash, and just under six years to get to $10 billion. “We happened to hit that in less than half the time, so we’re optimistic about the potential here – and think it will happen sooner than people think.”